Wednesday, October 10, 2012

Weak price action pre-10yr auction

There are treasury auction days when stocks are weak and things around the world seem to be falling apart...and on those, days demand for US treasury paper is fierce and even a treasury sale of 21bln 10yr notes command a premium price.  Today doesn't seem to be one of those days.  This is no commentary of the situation in Europe...things over there are a disaster.  I agree with everyone who says that the race to devalue industrial nation currencies will create massive inflation down the road.  However, thats not happening today...and not next week either.   Hyper-inflation will require the banks to lend out the excess reserves they are currently holding at the Fed.  This isn't happening yet.  Currently, it feels like the reverse...banks are suspiciously not lending.  Perhaps because they don't see large amounts of good credit borrowers...perhaps because they have privatel agreed with the Fed to hold back on lending (implicitly raising he RRR).  Either way, the results are the same....the Fed gets to monetize the debt, interest rates stay low, and today, there is no race to buy safe-haven assets.

 So, I expect a screws 10yr auction today at the lower end of the pre-auction price action.  There has been a 12 basis point selloff from month-end in 10yr yields.  This is by no means "huge"...but...a concession is a concession.  There should be enough of a short base to keep this auction from having a large tail.  In the same breath, I don't see screaming demand to buy US treasury paper doubtful there will be a large thru bid for safe haven buying.  Hence my call for a screws auction.  On the plus side for dealers, I don't see the market taking off and going back to the highs of the last 24 hours before the auction.  We will probably muddle around down in the current price zone pre-auction.  Then the universe of players who wait for the 10yr auction to help gauge demand for the 30yr auction will place their bets.  All in, I don't see a trade to do before the auction from current levels.  Wait for the results and see what the crowd of watchers do post-auction to determine what the game plan is for the 30yr auction setup tomorrow.

govttrader out

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